Bookkeeping is one of the essential tasks to ensure the success of your business. As a business owner, you need to learn about bookkeeping to help you make more informed decisions about your business's future performance.
Whether you bookkeep by yourself or hire another personnel, you should know different accounting terms to understand your finances. Below are five basic bookkeeping terms you need to know for the success of your business.
Assets are one of the main categories of your financial transactions. They refer to what the business has as monetary value. For example, you may have fixed or current assets, where fixed assets mainly include land or buildings while cash is the current assets.
Also, you include accounts receivable as assets. Accounts receivable are the company's sales but have not yet received payment and may be converted to cash in the short term.
Additionally, you record Inventories in the assets section and refer to what your business has purchased you have not made sales yet. Therefore, selling the inventory will translate to cash, an asset to your business.
Unlike assets, liabilities are the debts your business has that it has yet to pay. The main liabilities include payroll, loans, and accounts payable. Accounts payable are your business's expenses, but you have not yet paid. For your business to make a profit, you must always keep the liabilities low.
Equity refers to the value of your business once you pay off liabilities. It is also the portion of a company that you or your investors own.
The balance sheet's equity account includes the business owner's capital contributions and the corresponding withdrawals. In this case, cash and capital contributions increase your equity, while withdrawals reduce equity.
Revenues are also known as income, generating wealth from providing goods and services or investments. Also, revenue increases your equity.
Expenses refer to any cost your business incurs during its operation. They include salaries, rent, advertisement, administrative expenses, and insurance. Specifically, expenses are the resources used to generate income for your business. Contrary to revenue, expenses decrease your equity.
While you may bookkeep for your business, you should consider hiring a bookkeeping expert to help you with the task as you focus on more essential functions regarding your business. However, knowing the above terms may help you understand how bookkeeping works and make more informed decisions regarding your business.